Economists Say Liberal-NDP Deal Will Massively Worsen Inflation, Deficit

Trudeau's surprise announcement of a "supply-and-confidence" agreement with the NDP, which will prop up his minority government until 2025 in exchange for more social spending, is not being met positively by economists.

As part of the deal, there will be a dental-care program for low-income Canadians and a national prescription drug plan, both of which will likely be costly, permanent spending initiatives, economists said.

"The finance minister risks further undermining Ottawa's credibility in its commitment to tackling inflation," she said.

Young expects the pact, which has been denounced by the main opposition Conservatives, will lead to an additional $15 billion-$20 billion in government spending over the life of the three-year deal and potentially $40 billion in total by fiscal 2026-2027.

The jump in tax revenue resulting from surging inflation will likely mask much of the new spending in the near term, she said, but the deal could add half a percentage point to structural deficits over the medium term.

Fitch Ratings stripped Canada of one of its coveted triple-A credit ratings in June 2020. S&P Global Ratings and Moody's Investors Service still give Canadian debt their highest ratings.

The federal government's COVID-19 pandemic support programs have already pushed Canada's debt-to-GDP ratio to a projected peak of 48.0% in 2021/2022 from 30.9% in 2018/2019. It could decline more slowly from there due to the increased spending.

"It does look like it would open the pocket books at the federal level," said Pedro Antunes, chief economist at the Conference Board of Canada.

Canada, like other countries globally, is grappling with red-hot inflation, which hit a three-decade high of 5.7% in February. At the same time, businesses are scrambling to hire enough workers to meet booming demand.

New federal dental and prescription drug programs would require more specialized workers, who may demand higher wages, which could then create another round of inflation, Antunes said.

"We can start getting to that vicious spiral that we don't want to be in," Antunes said.